Lobbyists, Obama Enemies, Corporate Dictators: The Story of the Koch Brothers
Broke the law, kicked a brother out of a family business, became the GOP’s biggest donors: Charles and David Koch were able to turn Koch Industries into the second-largest private company in the US, but used controversial methods to do so.
“A huge company you’ve never heard of” is often used to characterize Koch Industries, a diversified conglomerate originally engaged in oil refining. It is now the second largest private company in the US after Cargill. The company owes its success to the sons of the founder, Charles and David Koch: under their leadership, Koch Industries has gone from a company with annual sales of $250 million to a corporate giant with revenues of $115 billion (data for 2020).
But they were famous for more than just that: Charles and David often resorted to dubious business practices, fought for corporate control with two other brothers for more than 20 years, and gained fame as extremely powerful shadow players in American politics.
In black gloves
The character and views of Charles and David were greatly influenced by their father, the son of a Dutch immigrant, Fred Koch. Back in the late 1920s, he developed an installation for more efficient oil production, but received a lawsuit for patent infringement. In 1928, he went to the USSR, where he helped build oil refineries. From there, Fred Koch returned a few years later, then his company was engaged in the construction of oil refineries in Germany. In 1940, he founded the Wood River Oil and Refining Company.
Fred Koch, a tough and principled man in business, followed the same approach in raising his four sons, Frederick, Charles and twins David and Bill. From the age of eight, while their peers rested and lazed on summer holidays, the brothers worked in the household (the family lived in Wichita, Kansas). They did not go to a private school, like the offspring of all wealthy Americans, but to a public one, and their friends later recalled that they had less pocket money than the children of factory workers. There was no place for “empty entertainment” in the house: so, despite the persuasion of his sons, Koch Sr. flatly refused to buy a TV. Study, sports and work were the only approved and encouraged activities, and in high school all the boys went to military academies.
However, the eldest, Frederick, did not justify his father’s hopes: the young man was not athletic, was not interested in family business, was fond of art and decided to study literature at the university. Fred Koch saw his second son, Charles, as his successor, who really grew up like him - a strong-willed, cold-blooded, very hardworking and rather closed person. “My father instilled in me a love of work at an early age, which he did a great service, although it didn’t feel that way then,” Charles later wrote. He was always friends with David, a sociable, cheerful and balanced boy, the more charming, athletic and intelligent of the twins. “I always got closer to David because he was just better at everything,” Charles later said.
He and the twins, like their father, received an engineering degree from the Massachusetts Institute of Technology, after which they all began working in the family business. Fred Koch died in 1967 and Charles took over the company, renaming it Koch Industries after his father. A few years later, David became his right hand.
Dangerous Philosophy
Charles proved to be a tenacious leader, and the firm began to grow rapidly. Koch Industries owned a 35% stake in the Pine Bend refinery in Minneapolis. At the same time, the Californian company Unocal owned a 40% stake, and entrepreneur Jay Howard Marshall owned a 15% stake. Charles was able to persuade the latter to merge his share with that of Koch Industries, then bought the shares from Unocal and thus gained control of the extremely profitable enterprise. The company had money for active growth, and it began to gradually develop new states in addition to Minnesota.
Gradually, the methods of doing business became more and more aggressive. Koch Industries laid pipelines to fields without the consent of oil companies, inflated prices, pumped out more oil from indigenous lands than was stipulated in contracts. In the late 1970s, the US authorities decided to distribute exploration sites using a lottery: the winners received ten-year leases for just $1. Koch Industries decided not to miss such a chance and organized a network of nominees - the winners were supposed to lease the plots to the company (later the scheme was revealed, and the company was found guilty of fraudulent conspiracy).
In the 1980s and 1990s, Koch Industries’ pipeline network continued to grow rapidly, and by 1994 it was already 37,000 miles (about 59,500 km) long. However, the pipelines were in a terrible state, leading to frequent oil spills. And this was partly due to the management philosophy of the Kochs, which was called “market-oriented management.” Performance bonuses were a significant part of employee remuneration. “Salary is just an add-on to the reward for creating value, and the potential for growth in this reward is limitless,” Charles explained. Because of this, it was simply unprofitable for employees (and the company) to stop work to fix minor malfunctions, the infrastructure was literally worn out.
As a result, Koch Industries was sued by the US Department of Justice, the Environmental Protection Agency and the US Coast Guard. The scale of the necessary repairs was estimated at $98 million, and the company was ordered to pay a fine of $30 million. In 1999, a butane leak occurred in one of Koch Industries’ pipelines in Texas, killing two teenagers - the company was found guilty of the tragedy. After that, the conglomerate revised its business model, reducing the number of pipelines directly owned by it to 4 thousand miles (approximately 6.4 thousand km), and began to diversify: since the early 2000s, Koch Industries has been actively entering into M&A transactions and developing new directions, from the pulp and paper industry to electronics and IT.
All these years, Koch Industries was under the complete control of Charles. “Charles is a company. Charles is in charge of everything,” said one financial expert. He never moved from his native Wichita and always led a quiet family life. David, who eventually took the position of vice president of the conglomerate, was in some ways his complete opposite: he lived in New York, led a noisy social life (his parties were even called “the East Coast version of parties [Playboy founder] Hugh Hefner”). At the same time, there was not a single business, family or political issue on which he would have disagreements with his older brother. Koch Industries remained private, which gave Charles and David complete freedom of action, and there was never any talk of going public. However, not everyone agreed with this state of affairs.
Corporate coup
The conglomerate has repeatedly found itself at the center of scandals, and perhaps the loudest and most difficult of them was the protracted conflict between Charles and David and their own brothers, Frederick and Bill.
Bill, like Charles and David, also built a career in the family business and headed one of the divisions of the company, their shares in the conglomerate were equal - each owned 20.7%. In reality, however, he was nowhere near as influential as Charles. In addition, Bill was dissatisfied with the size of dividends and believed that shareholders should receive more. Gradually, he gathered around him a “coalition” of shareholders, mostly members of the Koch family, who were also unhappy with the situation. Among them was the eldest of the brothers, Frederick. He had his own reason for resentment: he got 14.2% of the company’s shares (the result of a bad relationship with his father), and at one time Charles forced him to sell his share.
In 1980, Bill tried to take control to change the routine and perhaps even take the company public. He attempted to buy out Howard Marshall’s son’s share in order to gain a majority of the vote. However, Bill was ahead of Marshall himself, Sr., who all these years was blindly devoted to Charles. As a result, the combined share of Charles, David and Marshall amounted to 51%, and this allowed them to fire Bill from the company at the next meeting of shareholders.
To prevent similar attempts at a “palace coup” in the future, Charles and David decided to simply buy out the shares of the rebellious brothers and relatives. By 1983, they finally managed to agree on a price - $1.1 billion. The shares of Charles and David increased to 42%. But two years later, Bill said that the value of the company was deliberately underestimated, and filed a lawsuit with Frederick against Koch Industries. Proceedings and family feuds dragged on for 17 years. Bill hired private detectives to follow Charles and David, sued his mother, and then tried to challenge her will. Charles, in conversations with reporters, refused to call his younger brother by name, preferring the wording “another twin”, and David sobbed in court and accused Bill of destroying the family. It was not until 2001 that the differences were finally resolved.
“My father once told me that the easiest way to make a man hate you is to give him a lot of money,” Charles once recalled. I didn’t understand then what he meant. I understand it now."
Libertarianism and climate skepticism
In fact, Bill Koch had another reason for discontent - the great political ambitions of Charles and David. Like their father, who hated the left after a trip to the USSR, the brothers advocated a free market and adhered to libertarian views all their lives. Charles even persuaded David to run for vice president from the US Libertarian Party in the 1980 elections: he advocated the abolition of income tax, the elimination of almost all federal agencies, from the FBI to the Securities and Exchange Commission. But in the elections, the Libertarian Party failed, gaining only 1% of the vote. The defeat forced the brothers to reconsider their strategy - they realized that supporting a party that is not a significant political player will not help them achieve their goals. “We are not a country where we argue about political issues. We vote for the personalities of the candidates," David noted. So the Koch brothers became sponsors of the Republican Party.
Back in the 1980s, the brothers founded the political group Citizens for a Sustainable Economy, and in 2004, the Americans for Prosperity group, which quickly became one of the largest and most influential lobbying organizations in the United States, with about 700 wealthy donors. And this is not counting the support of many other political associations, whose activities have largely determined American politics in recent decades: they sought to reduce taxes, prevented the strengthening of state regulation of the economy and trade unions. The Koch brothers have denied ties to the Tea Party Movement, an organization opposed to Barack Obama’s social reforms, but many political experts point out that Americans for Prosperity helped the protesters.
The exact amount of Charles and David’s donations to various political, educational and research organizations is unknown (in the United States, for example, anonymous donations to election campaigns are allowed), but, according to various estimates, it ranges from $100 million to $1.5 billion. Koch’s views differ from those of the Republicans, in particular, they did not support the candidacy of Donald Trump (the 2016 election campaign, when Trump and Hillary Clinton were candidates from the Republican and Democratic parties, Charles Koch compared with “the choice between cancer and a heart attack”).
In addition, the Koch brothers are known for their support of organizations that criticize the theory of global warming, most notably the Cato Institute, of which Charles Koch is one of the co-founders. Koch Industries is ranked 23rd in the 2021 ranking of the 100 U.S. polluting companies by the Political Economy Research Institute at the University of Massachusetts Amherst.
With the exception of the 1980 elections, as political players, the Koch brothers managed to remain in the shadows for a long time, despite the scale of their activities. David Koch was best known as a generous philanthropist: personally and through family foundations, he donated more than $1.2 billion to various medical, educational and cultural institutions. A wing of the American Museum of Natural History and one of the theaters at Lincoln Center bear his name. “They’re clever. Right-wing, rednecks (residents of the rural hinterland of the United States - approx. RBC Pro) work for them. They perceive it as a way to achieve goals without getting their hands dirty,” said one of Kokhov’s former advisers.
Iron will
On one point the brothers disagreed. In 2018, it was announced that David Koch was leaving Koch Industries “for health reasons”. Sources close to the family claimed that Charles made this decision, while David resisted for a long time and did not want to retire. A year later, David Koch died, he was 79 years old.
Charles Koch, now 86, still runs Koch Industries and is estimated by Forbes to be worth $60.1 billion (June 2022). He arrives at the Wichita office early and works weekends. “I will keep going until I fall,” he once said.
Sources: New Yorker, The New York Times, Forbes, Rolling Stone, The Guardian, Mother Jones, PERI, Bloomberg.